CURRENCY: Pieces of paper and metal coins that circulate around the economy as the medium of exchange. Currency is usually (not always, but usually) authorized and used by the national government. U.S. currency is denominated in dollars and issued the Federal Reserve System (paper currency) and the U.S. Department of the Treasury (metal coins). Currency is approximately one-half of the official M1 monetary aggregate tracked by the Federal Reserve System. The other half is checkable deposits maintained by banks. M1 June 2004 (Billions) Component Amount Currency $676.8 Checkable Deposits 650.7 Nonbank Travelers Checks 7.7 Total M1 $1,335.2 Currency consists of paper bills and metal coins that along with checking accounts function as the medium of exchange for an economy. The official money supply for the U.S. economy contains almost equal portions of currency and checkable deposits. In particular, M1 includes ONLY the currency and coins held by the nonbank public, which is anyone and everyone EXCEPT commercial banks and government banking authorities. Currency and coins held by the nonbank public also go by the phrase "currency in circulation." Currency has taken many forms over the years and has been issued or authorized by different entities. The present manifestation of currency includes Federal Reserve notes issued by the Federal Reserve System and metal coins issued by the U.S. Department of the Treasury. In the not too distant past, currency also included gold and silver certificates issued by the U.S. Department of the Treasury and bank notes issued by commercial banks. The exhibit to the right illustrates the role currency plays in the M1 money supply for the U.S. economy. Paper Bills and Metal Coins Currency is the what most folks think about when the topic of money rises. Modern currency typical consists of both paper bills and metal coins. In the United States the paper bills are Federal Reserve notes and the metal coins are Treasury coins. Federal Reserve Notes: These are issued under the authority of the Federal Reserve System. They come in denominations of $1, $5, $10, $20, $50, and $100. A few bills carrying a $2 denomination are encountered from time to time, but they are not as widely used as the others. Denominations larger than $100 ($500, $1,000, $5,000, and $10,000) were also available once upon a time, but they too are seldom seen beyond the collections of numismatics. In a never ending effort to thwart counterfeiters, Federal Reserve notes underwent a major redesign beginning in the 1990s. Treasury Coins: These are issued under the authority of the U.S. Department of the Treasury. They come in denominations of one cent, five cents, ten cents, twenty-five cents, fifty cents, and one dollar. The coins were once made from pure metal (copper, nickel, and silver), with relative sizes reflecting the value of the metal content. However, pure metals gave way to less expensive metal alloys as coins made the transition from commodity money to fiat money. Fiat Money Modern currency, including that used in the United States, is fiat money. Fiat money is any medium of exchange in which the value in exchange is substantially more than the value in use. In other words, fiat money can be exchanged for valuable goods and services (value in exchange), but the paper and metal provides very little direct satisfaction of wants and needs (value in use). Metal Coins: In years gone by, metal coins were commodity money. The coins were constructed of gold, silver, nickel, and copper that had value in use comparable to their value in exchange. The relative size of modern coins (penny, nickel, dime, quarter, and half-dollar) reflect the value of the metal content from this period. That is, one cent worth of copper was used to produce a penny, five cents worth of nickel was used to produce a nickel, and ten cents worth of silver was used to produce a dime, etc. As the United States made the switch to fiat money, less expensive metal alloys rather than the pure metals were used to produce coins. The value of metal contained in a modern coin is significantly less than the denomination of the coin. Paper Bills: Also in years gone by, paper bills were fully backed by a equivalent value of metal money stashed away in a secure location. That is a one dollar bill was backed by one dollar's worth of silver or gold. This made the paper bills the next best thing to commodity money. However, with the move to fiat money, the connection between commodity money and paper bills was eliminated. The value of the paper and ink used to make paper bills is substantially less than the value of goods and services that can be purchased with the currency. Demand-Driven Currency The amount of currency in circulation in the U.S. economy is demand driven. That is, the federal government supplies whatever quantity of paper bills and metal coins that the public wants to hold. The government, however, DOES control the total amount of M1 money supply. In other words, if people want to withdraw "cash" from their checking account, the federal government ensures that an ample amount of "cash" is available. A curious sidenote of this demand-driven aspect of currency is the changing composition of M1. A few decades back, currency accounted for about one-fourth of M1. In the early 2000s, currency accounted for about one-half. Some economists speculate that this is attributable to an assortment of illegal activities, such as the drug trade, that rely on cash transactions. The Nonbank Public The currency component of the M1 monetary aggregate includes the currency held by the nonbank public. The nonbank public includes households, most businesses, and even most government agencies. These are the people, firms, and governments doing the job of exchange goods and allocating resources. The need the money to pursue these activities. More to the point, M1 EXCLUDES any paper bills or metal coins held by commercial banks and government banking institutions, such as Federal Reserve Banks and the U.S. Department of the Treasury. By excluding these banking institutions, the currency component of M1 is ONLY the currency that is in circulation. It specifically excludes any currency that has been printed but is store in a bank vault awaiting release to the public, currency that is NOT available to conduct transactions. Currency Redesign In the 1990s, Federal Reserve notes began experiencing a major redesign, the first in several decades. The most obvious change found with the new look was an enlarged portrait on the front that was moved slightly to the left. However, several other changes intended to thwart counterfeiters were also included in the redesign. Watermarks were added. High-tech, color-morphing inks were used. Microprinting that could not be duplicated by copy machines was also incorporated. Part of this redesign eliminated the designation of the Federal Reserve Bank that issue the note. This designation was contained in a small seal to the left of the portrait with the number and name of one of the twelve Federal Reserve Banks. It was replaced by a seal of the Federal Reserve System. This change reflected something of a consolidation of control in the issuing of Federal Reserve notes, moving it from the individual Federal Reserve Banks to the Board of Governors of the Federal Reserve System. Check Out These Related Terms...      | M1 | checkable deposits | monetary aggregates | M2 | M3 | L | currency | near monies | plastic money | Federal Reserve note | nonbank public | Or For A Little Background...      | money | money functions | money characteristics | fiat money | commodity money | medium of exchange | liquidity | And For Further Study...      | money creation | fractional-reserve banking | banking | Federal Reserve System | monetary economics | monetary base | monetary policy | debit card | monetary economics | seigniorage | Recommended Citation:      CURRENCY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: July 1, 2025].

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